The degree to which companies are advancing relative to companies that are declining is seen as a measure of current market trends.
The Theory of Market Breadth
The use of market breadth is based on the belief that emotions and feelings matter in the financial world. Many market theorists and investors would argue that the market only responds to facts, and that sentiment indicators have no place in investing.
Day traders generally tend to believe in market sentiment, and that market breadth is an important overall measure of current market trends.
Measuring Market Breadth
While there are some suggested measures of market breadth, there is no one universally accepted market breadth indicator.
Rather market breadth should be seen as a general concept that leads to a number of similar indicators used to measure current market sentiment based on the relative number and strength of advancing and declining stock prices in an economy.
Day Trading & Market Breadth
Many day trading strategies are based on market sentiment, which involves measures of what market participants believe rather than objective measures of financial or physical facts.
It is an indicator of economy-wide market sentiment, and can be used to predict industries, sectors or specific securities that are likely to be advancing or declining at a certain point in time.
While market breadth indicators cannot be used to trade directly, they can be used to identify potential trades by predicting general and specific market trends.
Market breadth is one of the more important sets of technical indicators used to measure market sentiment. Day traders in particular make use of market sentiment indicators, as markets generally tend to move on emotions and feelings in the short term, while moving according to facts and market cycles in the longer term.